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Daily Newsletter, Wednesday, 05/16/2001

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The Option Investor Newsletter Wednesday 05-16-2001
Copyright 2001, All rights reserved. 1 of 1
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MARKET WRAP (view in courier font for table alignment)
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05-16-2001 High Low Volume Advance/Decline
DJIA 11215.90 +342.90 11231.10 10814.30 1.35 bln 2082/1009
NASDAQ 2166.44 + 80.86 2171.22 2057.99 2.08 bln 2329/1551
S&P 100 664.60 + 18.34 665.13 642.46 totals 4411/2560
S&P 500 1284.99 + 35.55 1286.39 1243.02 63.3%/36.7
RUS 2000 497.21 + 7.58 497.90 487.41
DJ TRANS 2925.50 + 45.26 2925.94 2864.22
VIX 25.13 - 2.21 27.54 24.52
Put/Call Ratio 0.64
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Curbs In & Buyers Back
Benign inflation data and faith in the Fed. Today was a big
reversal day and the breakout in the Dow & SPX.X has established
a new trend. Who would have thought after yesterday's closing
failure? If you didn't catch the bottom for fear of getting
burned, you gotta be thinking here that this rally is safe to
jump onto. We got side-blinded but who's to complain? It always
feels better making money on the long side.
Given yesterday's 50 bp cut and Fed rhetoric toward fighting
further economic weakness were exactly what the market wanted.
However, as the euphoria wore off, concerns about what the Fed
knew that we didn't filtered through and demand disappeared.
The sell-off into Tuesday's close was exactly what we shouldn't
have done. This morning's CPI report came in better-than-expected,
0.3% vs. 0.4%, indicating that inflation was in check. We should
have known! The Fed wouldn't have given us what we wanted if
inflation was a concern (considering that they get a sneak peak at
most key economic data). Jim Kramer said it last night, you gotta
be a buyer, gimme some MO (NYSE:MO), sell me some Schlumberger
(NYSE:SLB). Today was evidence that we can trust the Fed. And
big time money went to work, blowing the roof off the Dow ($INDU)
and the S&P 500 (SPX.X), conquering key resistance points of
11,000 and 1272, respectively.
The Dow, indeed, looked like it wanted to go higher even after
yesterday's late session selling. Its recent move off of 10774,
which was last Friday's low, maintained a series of higher highs
and higher lows. Sure enough, the 10800 area held strong as
support today. We saw a classic intraday pattern of early
accumulation, followed by consolidation along 11,000 before
further accumulation and short-covering. Previous shorts got
squeezed hard, having to pare losses. But the big deal is that
we now have a lot of new money committed to long positions above
11,000, surely to be defended. After today's massive 342 point
day, the fifth biggest point gain ever, it wouldn't be a surprise
to see some short-term profit taking. You can be sure that a
pullback won't last long with the conviction and underlying
support from this new money. A pullback will offer good entries
into quality names like MO, Caterpillar (NYSE:CAT), Dupont (NYSE:DD),
and United Tech (NYSE:UTX). Hey, we're in a stealth bull market!
Key to the $INDU breakout today was the Cyclical Index (CYC.X),
which I mentioned in the Market Sentiment last week. The downtrend
line from May 1999 was broken today with a 4.28% parabolic gain.
The last time we had a similar technical development on the CYC.X
along with a breakout, the Dow ran from 10173 to 11130 between
April 4th and May 9th, 1999. This move in the CYC.X and the $INDU,
in conjunction with an extremely aggressive Fed, gives a strong
bullish signal. Deep cyclicals and Financials will lead this market
throughout the next six months. Yesterday represents the fifth
50 bp rate cut, totaling 250 bp since January, and EVERY time the
Fed cut five times like that, the market was higher a year later.
There have been five occurrences like this and three of them
resulted in double digits gains after a year.
An interesting development today was the implosion of volatility,
again. Today's move took the VIX.X below 25 briefly and settled
at 25.13. It could indicate that the VIX.X is returning to its
normal trading range roughly between 20 and 30, and if the Dow
continues to push higher, this very well may be the case. We
saw a similar implosion back in January during the initial post-Fed
rate cut rally, only to sell off again. This time feels different.
The Fed has since cut an additional 150 bps and the Dow is much
more technically sound. It's the Nasdaq that, while not unstable,
doesn't have the relative strength.
The Nasdaq has concerns of its own. It is still in a recovery
mode after hitting 1619 on April 4th. Bottomline is that the
Nasdaq incurred tremendous technical damage over the past year
and capital expenditure forecasts for tech companies remains in
question. Money is certainly cheap and going to get cheaper but
these companies are still gauging how overbuilt they may be.
Tomorrow's earnings reports from Ciena (NASDAQ:CIEN) before the
bell and Dell (NASDAQ:DELL) after the bell will give guidance
to the tech sector. Ciena will likely set the tone tomorrow.
Technically, the Nasdaq is still bouncing around its recent
trading range between 2000 and 2250. Support at the 2060 area
was tested early after the open today and the Nasdaq quickly
moved toward 2100. Following a brief consolidation along this
level, the Nasdaq took off into the close, finishing up 80 points
to 2166. We saw a reversal today and momentum tomorrow should
carry the Nasdaq to a challenge of immediate resistance at 2200.
It will be all about Ciena's guidance going forward, especially
considering that they have guided higher consistently.
Today gave us a technical breakout and a shift in sentiment.
Let's run with the bulls. We gotta buy the Dow via strong
Cyclicals and Financials. Tonight we added Merrill Lynch (NYSE:MER)
and General Electric (NYSE:GE), looking to participate in the
new trend in the Dow. Ideally, we are looking for a profit taking
pullback near support to enter. The Nasdaq will probably follow
suit, but keep in mind resistance overhead at 2200 and its
ultimate challenge at 2250. The SPX.X also broke above its long
time bullish wedge at 1272 handily, posting a 35 point gain.
I will talk more about key levels on all the indices tomorrow
in Market Sentiment. Until then, we're looking to Ciena's
comments in the morning as well as Initial Jobless Claims expected
to be 395K. Today was a pivotal point for market psychology, but
remember that nothing goes up forever. Trade what the market
gives you.
Trade Smart,
Matt Russ
Editor
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NEW CALL PLAYS
**************
EBAY - eBay Inc $57.86 +1.81 (-6.75 this week)
eBay is the world's largest online trading community. Founded in
September 1995, eBay is a powerful marketplace for the sale of
goods and services by a passionate community of individuals and
small businesses. The sellers pay a fee to have their items
placed on the company's Web site and the buyers get to browse and
make bids on the merchandise. If an item sells, eBay charges the
seller a percentage of the closing price. The company's rivals
in the auctioning arena are Yahoo! and Amazon.com.
The dotbomb may have detonated, but it left a few strong
survivors. While the money-losing business models of many
Internet firms did not survive the harsh scrutiny of analysts and
shareholders alike in a tough economic environment, those that
did make it did so on their abilities to generate positive cash
flow, gain critical user mass, or create a unique and powerful
brand. Leading electronic auctioneer EBAY has done all three,
under the guidance of strong management and the more than
competent leadership of CEO Meg Whitman. Still well off its
all-time high of $127.50, EBAY's stock price has outperformed its
sector in both good times and bad. While many industry peers are
still struggling under the weight of their major moving averages,
EBAY has surpassed those levels of overhead resistance. Recently
the company made some major customer wins, signing up CMP Media
and famed watchmaker Rolex. The company's frictionless business
model has proven itself to not only be unique, but also viable.
At this point, the stock appears poised to challenge the $60
level. A bullish surge above $58 may allow conservative traders
to make a play, but only if Merrill Lynch's Internet HOLDR (HHH)
confirms upward momentum. Aggressive players looking for entries
on pullbacks may find moving average support from the 5 and
10-dma at $55.33 and $53.65 respectively. Just keep in mind that
we are placing our closing stop at $55. Horizontal support may
also be found at $57, $55.75 and $55.
BUY CALL JUN-55 QXB-FK OI=4505 at $6.80 SL=5.00
BUY CALL JUN-60*QXB-FL OI= 953 at $4.20 SL=4.50
BUY CALL JUN-65 QXB-FM OI= 484 at $2.45 SL=1.25
BUY CALL JUL-60 QXB-GL OI=5931 at $6.80 SL=5.00
BUY CALL JUL-65 QXB-GM OI=4531 at $4.80 SL=3.00
SELL PUT JUN-50 QXB-RJ OI=4698 at $2.05 SL=3.75
(See risks of selling puts in play legend)
Average Daily Volume = 5.57 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=EBAY
GE - General Electric $52.21 +2.06 (+3.20 this week)
General Electric is one of the largest and most diversified
industrial corporations in the world. GE's products include
major appliances, lighting products, industrial automation
products, medical diagnostic imaging products, motors, electrical
distribution and control equipment, locomotives, power generation
and equipment products, nuclear power support services and fuel
assemblies, commercial and military aircraft jet engines, and
engineered materials. Through General Electric Capital, GE
offers a broad array of financial services. Through NBC Inc.
GE provides television, cable and multimedia programming
services.
As one of the largest and most diversified companies in the
U.S., GE is often considered a proxy for the overall strength
of the broad market indexes, particularly the Dow and S & P.
GE has been languishing in a tight trading range between
$48 and $50 for several weeks, consolidating its gains since
rallying from a 52-week low of $36.44 on March 22. At this point
it seems that hints of future interest rate cuts by the
Fed are whetting investors appetites for this dependable
stalwart, which has acted like a beacon in an uncertain market.
In addition, it seems likely that GE will rally on the
anticipation of the completion of the Honeywell merger, which
was announced last fall. This deal was under investigation
by the Justice Dept., and on May 3rd, the department gave their
approval, with a few conditions which are not expected to
present a problem. In an announcement which further bolstered
the bullish momentum, GE announced last Thursday that they
expect earnings to come in at the high end of expectations.
GE's President and Chairman elect Jeffrey Immelt stated that
the company's diversity and digital transformation have
reduced their sensitivity to business cycles. With all this
good news, and strength in the major indexes, GE plowed
through its 200-dma of $50.42, with good volume of over
24 million shares. After the remarkable rally we experienced
on Wednesday, a pullback of some degree seems highly probable.
A pullback to light support at $51.50 could present an
aggressive entry point. Alternatively, traders could take
positions at the current level, if the Dow and S & P are strong.
The next major resistance level is $55, and if institutions
start buying more aggressively, we may see GE clear this
level in the near term future. We are setting a liberal
closing stop at $49, to give GE plenty of room to move.
BUY CALL JUN-50*GE-FJ OI=45339 at $3.20 SL=1.75
BUY CALL JUN-55 GE-FK OI=64117 at $0.90 SL-0.00
BUY CALL SEP-50 GE-IJ OI=23236 at $5.40 SL=3.50
BUY CALL SEP-55 GE-IK OI=18416 at $2.95 SL=1.50
Average Daily Volume = 21.9 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=GE
MER - Merrill Lynch & Co. $69.98 +2.83 (+4.99 this week)
With its bull icon prominently displayed, many investors view
Merrill Lynch as the leader of herd. The diversified Financial
powerhouse provides investment, financing, advisory, insurance
and related products and services on a global basis to both
individuals and institutions. Its Corporate and Institutional
Client Group offers investment banking, brokerage and clearing
services to corporate and government clients. MER has been
slow to move into the online world, entering the online trading
ring in 1999.
As the DJIA launched through the formidable 11,000 barrier today
in the wake of the 5th consecutive 50 basis point interest rate
cut, Financial stocks led the charge. MER led the Brokerage
sector higher with 4% gain, further distancing itself from its
200-dma (currently at $65.29). While volume was still rather
light, the move was solid, and buying volume increased
throughout the afternoon as the stock moved through the
long-standing $68 resistance level. With all of the major
indices marching in the same direction and being led by both
Cyclical and Financial stocks, it looks like this rally could
actually be for real. The bulls are licking their chops,
focusing on the economic recovery that is expected in the second
half of the year, and are likely setting their sights on new
highs for MER. Given the strength of the move today, MER could
continue higher from current levels, but we need to beware of
profit taking. Continued strength that pushes the stock through
the $70 level could be the cue for initiating new positions, but
keep a tight reign in case the bears show up. More attractive
entry points could materialize tomorrow on a pullback and bounce
at the $68 and $67 intraday support levels or at our $66 stop.
This is clearly a momentum play, and we want to ride it as long
as the bulls remain in charge. Keep an eye on the Securities
Broker/Dealer index (XBD.X). Continued strength in this index
will support a continued move higher for our play.
BUY CALL JUN-65 MER-FM OI= 4796 at $7.00 SL=5.00
BUY CALL JUN-70*MER-FN OI=16649 at $3.70 SL=2.25
BUY CALL JUN-75 JMR-FO OI= 2051 at $1.65 SL=0.75
BUY CALL JUL-70 MER-GN OI=22505 at $5.50 SL=3.50
BUY CALL JUL-75 JMR-GO OI= 7002 at $3.40 SL=1.75
SELL PUT JUN-65 MER-RG OI= 2280 at $1.75 SL=3.50
(See risks of selling puts in play legend)
Average Daily Volume = 5.93 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=MER
ADBE - Adobe Systems $41.09 +2.30 (+1.23 this week)
A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production. Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker. Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications.
While old economy stocks led the charge in today's broad market
rally, there were some impressive gains in the Technology sector
as well. The GSTI Software index (GSO.X) put in a solid bounce
from recent support and posted better than a 5% gain on the day.
Not to be outdone, ADBE gained 6% on solid buying volume (just
slightly below the ADV). Investors seemed to take yesterdays
interest rate cut in conjunction with today's economic reports
as evidence that the economy will be well on the road to
recovery by the end of the year, and they are starting to vote
with their wallets. Whether this is the recovery we have been
waiting for so patiently remains to be seen, but at the very
least, it looks like a tradable rally. Today's rally solidified
support at the $38 level (the top of the gap from April 18th),
and with daily Stochastics just about to poke out of oversold,
ADBE could be ready to run. It won't be an easy road, though.
By the closing bell, the stock had risen to the $41 resistance
level, just below the 30-dma (currently $41.25). Conservative
investors will want to see the stock clear $41.25 on continued
strong volume before taking a position. Once this event occurs,
ADBE will have broken the month-long descending trendline, and
the chart will be looking even more bullish. More aggressive
players can target shoot intraday dips in the next couple days,
so long as the dip is followed by a bounce. We don't want to
get overzealous and try to catch a falling knife if the bears
show up to spoil our party. Support looks firm near $38, so
that will be the initial placement of our stop. A close below
that level would confirm the bears have not gone into
hibernation just yet, and bring our play to a premature end.
Look for continued strength in the GSO.X to confirm the health
of ADBE's rally before playing.
BUY CALL JUN-40*AEQ-FH OI= 464 at $4.30 SL=2.75
BUY CALL JUN-45 AEQ-FI OI= 856 at $2.30 SL=1.25
BUY CALL JUN-50 AEQ-FJ OI= 892 at $1.10 SL=0.50
BUY CALL JUL-45 AEQ-GI OI=1634 at $3.90 SL=2.50
BUY CALL JUL-50 AEQ-GJ OI=1508 at $2.50 SL=1.25
SELL PUT JUN-35 AEQ-RG OI= 487 at $1.60 SL=3.25
(See risks of selling puts in play legend)
Average Daily Volume = 5.35 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=ADBE
************
NEW PUT PLAY
************
ENE - Enron $55.01 -1.98 (-3.19 this week)
Originally only an energy company, in recent years ENE has
moved into the communications market as well. Through its
subsidiaries, the company is primarily engaged in the
transportation of natural gas through pipelines throughout the
United States, and the generation, transmission and distribution
of electricity to markets I the northwestern United States. ENE
also markets natural gas, electricity and other commodities and
finance services worldwide. Most recently, the company has
moved into the Communication business, developing an intelligent
network platform to provide bandwidth management services and
deliver high bandwidth applications.
Single-handedly dragging the Dow Jones Utilities (DJU.X)
underwater in what was otherwise a stellar day in the markets,
ENE gave up 3.5% on volume that nearly doubled the ADV. What's
going on here? A moderate volume high-point-gain day for the
broad markets, but ENE was heavily sold? You got it, and bad
news was the catalyst. Lenders to the company's Dabhol Power
Company (DBC) have postponed until Thursday a crucial vote on
canceling the contract to sell power to India's Maharashtra
state. The company has been sparring for six months now over
payment defaults by the Maharashtra State Electricity board and
the matter is expected to be resolved by a cancellation of the
contract. Of course, it doesn't help that ENE has been largely
unsuccessful in influencing the Bush White House with respect to
the President's forthcoming energy plan. ENE investors fled the
stock in droves today, pushing it right down to the critical $55
support level. Over the past 2 weeks, the stock has been
finding resistance near the 30-dma (currently $59.09), yet
buyers couldn't even test that level today. It was a long,
steady decline from the open to close, which came right at the
low of the day, as volume shot through the roof in the final 2
hours. Nearly 3 million shares traded hands in the final hour,
and that doesn't bode well for the stock tomorrow. Conservative
traders will want to initiate new positions as further weakness
pushes the stock below $55. ENE found support near $53 in
April, so beware of a bounce near that level. Resistance has
been building in recent days at $57-58; more aggressive traders
can target shoot new entries on a failed rally near this level,
so long as the buyers can't manage a close above our $58 stop.
BUY PUT JUN-60 ENE-RL OI=2935 at $5.80 SL=3.75
BUY PUT JUN-55*ENE-RK OI=2234 at $2.50 SL=1.25
BUY PUT JUN-50 ENE-RJ OI=2155 at $0.90 SL=0.00
Average Daily Volume = 3.62 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=ENE
*****************
STOP-LOSS UPDATES
*****************
MO - call play
Adjust from $50.50 up to $51
GDW - call play
Adjust from $60.50 up to $61.75
CAT - call play
Adjust from $51.75 up to $53.75
JNY - call play
Adjust from $44 up to $45
*************
DROPPED CALLS
*************
GPS $34.15 +0.87 (+0.95) We mentioned yesterday that we were
looking for one last burst of strength in GPS before closing out
this play ahead of its earnings report, due tomorrow after the
closing bell. A strong day for the broader markets worked in our
favor, as shares of the popular apparel retailer gained 2.61
percent. At this point, the chart still looks bullish. But with
what has turned out to be a substantial profit in this call play,
we are following our sell rule to the letter and taking our gains
off the table.
************
DROPPED PUTS
************
DIGL $46.25 +3.66 (+3.95) While it appeared yesterday that we
might have been faced with a post-Fed rate cut sell off, today's
action was extraordinarily positive for the bulls. Most of the
major sectors experienced heavy buying, as well as short covering.
The Nasdaq still has some major hurdles to cross, and DIGL may
sell off further if we have a pullback. Nonetheless, the stock
has closed above our stop level, and as such, we are dropping
it tonight.
EMLX $42.87 +5.28 (+4.07) In a delayed sort of reaction, the
bulls really charged forward today. This time, when EMLX
crested the $39 resistance level, the bulls never looked back
pushing the stock higher throughout the day. The combination
of yesterday's interest rate cut and benign economic reports
this morning gave fuel to the rally, leaving our $39 stop in
the dust. This is exactly the type of move our stops are
designed to protect against as we still escaped with a gain.
HGSI $61.67 +4.63 (+3.79) In full participation with the
broader markets, Biotech stocks surged strongly today after the
opening dip, and by the close of trading the Biotech index
(BTK.X) was sitting well above $540 level. With a nearly 7%
move for the index, it is no surprise that HGSI shot right
through its $60 stop early in the day. Volume was still on the
light side, but the resilience of the bulls in today's session
points to further gains this week, and we are just as happy to
step aside and let the buyers have their fun.
JNPR $57.89 +4.74 (+3.63) It took Networking stocks a bit longer
to get moving than the rest of the market, and JNPR spent most
of the day meandering near our $55 stop. Then with a burst of
buying volume, the bulls finally left this level behind in the
final 2 hours of trading, bringing JNPR up to close just shy of
$58, near the high of the day. Once again, stop losses saved
our bacon, giving us a respectable exit from a play that could
have gone sharply against us. The strong close could be
forecasting more gains through the rest of the week, and we will
gladly move JNPR to the drop list and go looking for the next
play.
MERQ $67.17 +7.92 (+5.85) MERQ began recovering from the
negative open, almost before the sound of the opening bell had
faded away. Gradually moving higher throughout the session, our
hopes for another entry into the play were dashed shortly after
the lunch hour as the bulls pushed the stock solidly through our
$65 stop. They didn't stop there either, as MERQ continued to
rally right up to the closing bell. Volume was solid, and the
bulls look ready to stampede even higher later this week. While
the $68 level may represent resistance for the stock, we don't
want to place too much stock in that, given all the solid
resistance levels that were smashed in today's session.
NVLS $52.85 +4.65 (+3.76) Although AMAT's earnings report last
night was far from stellar, their comments about a 'bottom' in
the current chip cycle seemed to give new life to the
Semiconductor Equipment stocks this morning, as they found
support and began moving higher shortly after the opening bell.
Even bearish comments from Dan Niles about the 3rd quarter
revenues continuing to decline couldn't dampen the bulls
enthusiasm. NVLS found support at $47, and rallied consistently
throughout the day. Clearing our $50 stop during the lunch
hour, this further energized the bulls as they pushed higher
right into the close, posting a nearly 10% gain on the day.
Sentiment has clearly shifted and the bears are going to have a
hard time pushing Semiconductor stocks lower in the near future.
BRCM $40.55 +3.41 (+2.06) While uncertainty over the climate
surrounding the Semiconductor is still being called into
question, if traders were asked today whether the Chip sector has
hit bottom, the answer most likely be an affirmative. Despite
disappointing earnings from chip equipment maker AMAT, who missed
Street estimates by a penny, bullish comments during the
conference call in which the company came out to say that there
will likely be an upturn in the second half of the year will due
to new computer sales were more than well received. In addition
to this, chipmakers moving to new technologies and processes may
not only realize a boost in efficiency, but also benefit from
lower costs going forward. With that, BRCM rallied over 9
percent today and in doing so, closed above our stop price of
$40. As a result, we are dropping coverage.
DOX $62.50 +1.64 (+1.20) Ending the day right at our recommended
closing stop price of $62.50, we are playing it safe and
preemptively closing out this put play. Today's rally of 2.69
percent, while light in volume, was more than enough to give the
bears good reason to be nervous. Today's close put the stock
above its 100-dma at $62.07 for the first time in over two
months. Continued bullish action in the broader markets could
help DOX overcome its last line of moving average resistance from
the 200-dma at $63.03. Look for any weakness tomorrow as an
opportunity to sell open positions.
**************
TRADERS CORNER
**************
Jumpin' Juniper
By Mary Redmond
Over the past few weeks, there have been opportunities to profit
from bearish trades in the networking sector. Since many of the
networking stocks are both volatile and liquid, trading can be
both profitable and dangerous. It is always important to monitor
the action of the broad market indexes, the sector, the volatility
indicators, and other indicators like the stochastics and tick.
We started too see hints that a pullback in the Nasdaq was likely
around the beginning of May, as the index failed at two attempts
to clear strong resistance at 2250. In addition, shortly after
this, it became apparent that the stochastic oscillator was
demonstrating divergence from the Nasdaq in a overbought
condition.
Around this time, we began to see weakness in several of the
sectors which are critical to supporting the Nasdaq. For example,
the first week in May, the Networking Index, NWX.X, failed to
rally past the 500 level and pulled back. In addition, the
Semiconductor Index, SOX.X, started to pullback after failing to
rally from lower highs at 697 and 687. These indexes also
displayed divergence in the stochastic oscillator. It is very
difficult for the Nasdaq to rally without participation from the
Semiconductor sector, the Software sector (GSO.X), and the
networking sector.
In addition, the volatility indicators for the Nasdaq, the VXN.X
and the QQV.X had made significant retracements from their
previous abnormally high levels. The VXN had moved down from
its highest level of 85 in mid-April to a low near 65, and the
QQV had moved down from over 70 to the mid-50s range.
While the Nasdaq appears to have strong support at 2000, there
are many Nasdaq stocks which are still good bearish plays.
Many of the former high flyers have so much overhead resistance
that it seems they might require a prolonged period of excellent
news and bullish earnings forecasts before they can stage a full
recovery.
Juniper fit into this category in the beginning of May, as the
weakness in the Networking sector, as well as cautious comments
from bellwethers like Cisco seemed to cast a cloud of uncertainty
on suppliers of networking and telecom equipment companies.
The forecasts for capital spending in the coming months are
still vague, as company managements attempt to grapple with the
uncertain macroeconomic forecasts, and no one wants to commit
to stating that they know when a real recovery will ensue.
You can see from the chart how Juniper made a bearish double
top pattern, which coincided with a bearish stochastic divergence.
At this point, considering the weakness in the Nasdaq and the
Networking sector, it seemed that the odds favored a downside
move.
Downside trades can be dangerous when we are in the middle of
a Fed easing cycle. However, it seems unlikely that we will
rally straight up from here without some type of pullback,
particularly on the Nasdaq. Investors will demand proof from
companies in the form of earnings that the recovery is sustainable.
It makes sense at this point to make quick one or two day trades
using several different indicators. The tick.nq has proven to be
very useful as an indicator for Nasdaq trades. When the tick.nq
hits a negative 500, it can signal a buy opportunity. When
the tick.nq hits a positive 500 or greater, this often means
a selling opportunity.
We can see in a chart how the tick was highly useful in selecting
an entry point for a bearish trade in Juniper, which coincided
with weakness in the Nasdaq.
You see how JNPR rolled over at the points at which
the tick.nq spiked up? This occurred simultaneously with
the volatility indicators, the VXN and QQV spiking to low
levels.
As a side note, it is interesting to see that the tick.nq has
been trading in an increasingly narrow wedge over the last
several weeks. It is not clear if this is indicative of any
future action, but it seems likely that a breakout of this
range may occur.
Those who have been paying attention to the cyclical index,
CYC.X, may have noticed that it appears to have broken the
long-term downward trend it had established in January of 1999.
However, the volatility indicators have been breaking out
to the downside during today's action. How much lower can they
go? No one knows, but as investors' perceptions of future
market ranges evolve, we could be looking at new trading ranges
for the VIX, VXN, and QQV. It seems that caution would
prevail here, as the VIX spiked way out of its Bollinger bands
to the downside when the Dow hit 11,000. Monitor this volatility
situation closely with such a drastic move today. It can be
a trade-saver.
**********************
PLAY OF THE DAY - CALL
**********************
MO - Philip Morris Companies, Inc. $52.35 +1.43 (+0.60 this week)
With 2000 underlying operating revenues of $80.3 billion,
($88.3 billion assuming Philip Morris owned Nabisco for all
of 2000) the Philip Morris family of companies is the world's
largest producer and marketer of consumer packaged goods.
Philip Morris Companies Inc. has five principal operating
companies : Kraft Foods Inc., Miller Brewing Company,
Philip Morris International Inc., Philip Morris Incorporated,
and Philip Morris Capital Corporation.
Most Recent Write-Up
With the spotlight on the Federal Reserve, MO took a back seat
over the last two days, as investors struggled to find a clear
trend, and interpret the future policy directives. Some
disconcerting news was released concerning a possible increase
in the cigarette tax, and FDA regulation of cigarettes, as well
as new tobacco rules adopted by the European parliament. Despite
this news, and a somewhat disappointed market, MO maintained
firm support at the $50.50 level. The closer we get to the
Kraft IPO, the more attention MO will attract, and it is
likely that we could see a strong rally in the shares in the
days ahead. Aggressive traders could take positions at the
current level, if the overall indexes are exhibiting strength,
as well as others in the sector, like LTR and RJR. As an
alternative strategy, wait for MO to move above its
converged 5-dma and 10-dma of $51.50 on strong volume before
entering. We are keeping stops at $50, so close the position
if MO closes below this level.
Comments
It looks like MO wants to go. The way of the Dow is the way
of MO. With the massive breakout today in the $INDU, we are
making MO the call Play of the Day. A pullback in the Dow is
to be expected but it will most likely be short-lived as
buyers step up earlier and earlier. Entry off of intraday
support at $51.50 would be ideal. If it doesn't retrace that
much, watch for buyers and an entry at $52.
BUY CALL JUN-50*MO-FJ OI=26314 at $3.70 SL=1.75
BUY CALL JUN-55 MO-FK OI=16571 at $1.10 SL=0.50
http://www.premierinvestor.com/oi/profile.asp?ticker=MO
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BIG CAP COVERED CALLS & NAKED PUT SECTION
*****************************************
A Delayed-Reaction Rally Pushes The Dow Past 11,000!
By Ray Cummins
Stocks rallied today with the Dow industrial average climbing to
a 9-month high as investors cheered favorable inflation data.
News that consumer prices rose more moderately than expected in
April lifted the mood on Wall Street and gave credence to the
Fed's aggressive approach to restoring the sagging U.S. economy.
The consumer price index rose 0.3% versus expectations for a 0.4%
increase. The core index, which excludes the volatile food and
energy components, rose only 0.2% and most experts perceived the
data as an indication that inflation will continue to ease into
the coming year. In other economic news, April housing starts
were higher than expected, furthering the view that a recession
is unlikely since an economic collapse generally begins with a
failure in the construction sector. Analysts said the bullish
inflation report simply fueled optimism that the Fed may not be
done cutting rates and that led to a broad-market rally. Buying
pressure in blue-chip stocks quickly spread to other sectors and
by midday, all the major indices were participating in the upside
activity. The Dow Industrials plowed through the 11,000 mark on
strength in Alcoa (NYSE:AA), Hewlett-Packard (NYSE:HWP), Procter
& Gamble (NYSE:PG), Merck (NYSE:MRK), Minnesota Mining (NYSE:MMM)
and Caterpillar (NYSE:CAT). The NASDAQ also enjoyed exceptional
gains with semiconductor and software shares leading the way.
Positive reports from software maker BEA Systems (NASDAQ:BEAS),
chip-equipment maker Applied Materials (NASDAQ:AMAT) and doughnut
maker Krispy Kreme Doughnuts (NASDAQ:KREM) helped boost investor
sentiment in technology stocks. In the broader S&P 500 groups,
drug, biotechnology, gold, consumer and cyclical sectors were the
best performers and very few groups retreated during the session.
Summary of Previous Candidates:
Covered Calls: (Margin not used in calculations)
Stock Strike Strike Cost Current Gain Potential
Symbol Month Price Basis Price (Loss) Mon. Yield
PDII MAY 65 62.30 86.90 $2.70 5.7%
NVDA MAY 60 57.76 85.49 $2.24 5.1%
Naked Puts:
Stock Strike Strike Cost Current Gain Potential
Symbol Month Price Basis Price (Loss) Mon. Yield
CMVT MAY 65 64.15 68.36 $0.85 13.4%
ENZN MAY 55 54.55 61.84 $0.45 8.9%
AMAT MAY 40 39.50 54.10 $0.50 8.3%
CCMP MAY 35 34.00 66.32 $1.00 7.1%
FCEL MAY 40 39.20 80.30 $0.80 6.6%
NVDA MAY 45 43.95 85.49 $1.05 6.5%
MUSE MAY 25 24.35 38.00 $0.65 6.2%
PDII MAY 60 59.50 86.90 $0.50 5.9%
NVDA MAY 55 54.45 85.49 $0.55 5.7%
PDII MAY 55 54.35 86.90 $0.65 5.5%
VSTR MAY 85 84.10 97.79 $0.90 5.4%
NVDA MAY 45 44.35 85.49 $0.65 5.2%
GS MAY 80 79.00 99.95 $1.00 4.8%
KREM JUN 40 38.75 56.40 $1.25 9.0%
CMVT JUN 55 53.55 68.36 $1.45 7.3%
ENZN JUN 50 48.85 61.84 $1.15 6.8%
APWR JUN 35 34.30 51.55 $0.70 5.5%
Sell Strangles:
Stock Strike Strike Cost Current Gain Potential
Symbol Month Price Basis Price (Loss) Mon. Yield
AMAT MAY 38p 36.60 54.10 $0.90 7.9%
AMAT MAY 70c 70.70 54.10 $0.70 6.3%
CHIR MAY 38p 36.55 49.97 $0.95 10.3%
CHIR MAY 50c 50.95 49.97 $0.95 10.2%
XLNX MAY 30p 29.55 44.18 $0.45 6.1%
XLNX MAY 60c 60.55 44.18 $0.55 7.4%
CIEN MAY 40p 39.10 58.90 $0.90 13.2%
CIEN MAY 80c 80.75 58.90 $0.75 11.2%
CIEN MAY 45p 44.50 58.90 $0.50 13.4%
CIEN MAY 75c 75.50 58.90 $0.50 13.4%
Naked Calls:
Stock Strike Strike Cost Current Gain Potential
Symbol Month Price Basis Price (Loss) Mon. Yield
LH MAY 160 161.45 133.50 $1.45 6.6%
CIEN MAY 90 90.60 58.90 $0.60 6.6%
CHKP MAY 90 90.65 54.19 $0.65 6.4%
SII MAY 85 86.40 79.48 $1.40 6.3%
Credit Spreads:
Stock Pick Last Position Credit C/B G/L Status
UTX $72.85 $82.90 MAY85c/80c $1.00 $81.00 $-1.90 Closed
HMC $91.29 $87.65 MAY80p/85p $0.65 $84.35 $0.65 Open
BGEN $59.23 $60.28 MAY70c/65c $0.75 $65.75 $0.75 Open
LEH $76.75 $78.94 JUN60p/65p $0.70 $64.30 $0.70 Open
Debit Straddles:
Stock Pick Last Position Debit Value Target Status
NUE $49.80 $52.50 JUN50c/50p $3.90 $3.85 $4.90 Open
The Alliance Capital (NYSE:AC) straddle has traded above the 25%
target credit of $5.38 several times over the last several weeks.
New Candidates:
This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook. In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies. (We monitor the positions marked with ***).
*******************************************************************
BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations
*******************************************************************
FCEL - FuelCell Energy $80.30 *** On The Move! ***
FuelCell Energy (NASDAQ:FCEL) is a developer of carbonate fuel
cell technology for stationary power generation. The company
has developed a proprietary patented carbonate fuel cell, which
the company believes has significant advantages in terms of fuel
efficiency and cost over competing fuel cells for stationary power
generation. The company manufactures carbonate fuel cells, usually
on a contract basis. Its revenue is primarily generated from
agencies of the United States government and customers located
throughout the United States, Europe and Asia.
The rally in FCEL started in early April after a published report
that a state project would use the company's fuel cells in what
analysts described as the "largest fuel cell commercialization
effort anywhere in the U.S. to date." The Connecticut Resources
Recovery Authority (CRRA) has proposed spending $124 million over
five years for FCEL's products through a new contract with their
distributor, Enron North America (NYSE:ENE). Enron will serve as
project developer and twelve fuel cell units will be installed at
multiple sites in Connecticut to relieve transmission congestion
in the Southwestern part of the state and add needed capacity. A
Lehman Brothers utility analyst said he believes the request for
purchase is a significant step towards technology validation and
commercialization of the company's products and an order of this
magnitude would absorb half of FuelCell's anticipated year-end
production of 50 megawatts and provide a significant step towards
reaching the $1200/kilowatt cost target the company has outlined.
The news started a recovery in FCEL shares and alternative energy
technology stocks continued to rally after California suffered a
series of statewide blackouts and officials warned of a potential
for future energy shortages. Power plants were providing limited
output due to plant maintenance and refueling and that condition
combined with high demand overwhelmed the available electricity
supplies, creating power outages throughout the state. Today's
move propelled the stock to a 6-month high on heavy volume and
traders who believe the trend will continue can speculate on that
outcome with these conservative positions.
FCEL - FuelCell Energy $80.30
PLAY (sell naked put):
Action Month & Option Open Closing Cost Target
Req'd Strike Symbol Int. Price Basis Mon. Yield
Sell Put JUN 60 FQG RL 75 0.95 59.05 5.7% ***
Sell Put JUN 65 FQG RM 60 1.75 63.25 9.6%
Sell Put JUN 70 FQG RN 184 3.00 67.00 12.3%
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=FCEL
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IMCL - Imclone $44.45 *** New Drug Development! ***
Imclone Systems (NASDAQ:IMCL) is engaged in the research and
development of novel cancer treatments. The company focuses on
growth factor inhibitors, therapeutic cancer vaccines and unique
angiogenesis inhibitors. The company's lead product candidate,
IMC-C225, is a therapeutic monoclonal antibody that inhibits
stimulation of a receptor for growth factors upon which certain
solid tumors depend in order to grow. IMC-C225 has been shown in
several Phase I/II trials to have an acceptable safety profile,
to be well tolerated and, when administered with either radiation
therapy or chemotherapy, to enhance tumor reduction. The company
is also developing inhibitors of angiogenesis, which could be used
to treat various kinds of cancer and other diseases. Imclone has
identified IMC-1C11 as a lead clinical candidate for angiogenesis
inhibition. IMC-1C11 is an antibody that binds selectively and
with high affinity to KDR, a principal Vascular Endothelial Growth
Factor (VEGF) receptor, inhibiting angiogenesis.
Today's rally in ImClone shares capped a recent recovery on new
speculation about the company's lead product candidate, IMC-C225,
which is being studied for treatment of colorectal and other
cancers. Analyst Cory William Kasimov at Gruntal said the data
presented by Imclone is encouraging because the product, when
combined with another drug, has demonstrated a favorable overall
response rate that is well above the 15% believed necessary for
approval. The analyst also said the report presented this past
weekend substantiates his belief that C225 has "billion-dollar"
annual sales potential and Imclone stands to achieve substantial
profits from the unique product. Investors have pushed the share
value to a 6-month high on the bullish news and these positions
offer a reasonable cost basis in the issue.
IMCL - Imclone $44.45
PLAY (sell covered call or naked put):
Action Month & Option Open Closing Cost Target
Req'd Strike Symbol Int. Price Basis Mon. Yield
Sell Call JUN 40 QCI FH 6020 6.60 37.85 5.8% ***
Sell Put JUN 35 QCI RG 156 0.65 34.35 6.9% ***
Sell Put JUN 40 QCI RH 1136 1.95 38.05 12.9%
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=IMCL
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MER - Merrill Lynch $69.98 *** Brokerage Sector ***
Merrill Lynch (NYSE:MER) is a holding company that, through its
subsidiaries and affiliates, provides investment, financing,
advisory, insurance and related products and services on a global
basis. Merrill Lynch provides these products and services to a
wide array of clients, including individual investors, small
businesses, corporations, governments, governmental agencies and
financial institutions. Merrill Lynch has three major business
segments, the Corporate and Institutional Client Group, the
Private Client Group and Merrill Lynch Investment Managers. The
company provides financial services worldwide through various
subsidiaries and affiliates that frequently participate in the
facilitation and consummation of a single transaction. Merrill
Lynch has organized its operations outside the United States into
five regions, Europe, Middle East and Africa; Japan; Asia Pacific
and Australia; Canada, and Latin America.
Merrill Lynch is one of our favorite issues in the Investment
and Brokerage group and these companies are statistically some
of the best-performing issues after a rate cut. In addition,
the company has recently been the target of merger speculation
and officials from HSBC Holdings (NYSE:HBC) and Merrill have
tried to quell rumors that they will combine to form a financial
services group that would give it the clout to rival industry
leading Citigroup (NYSE:C). HSBC, Britain's largest bank, said
the two firms have had no talks on extending their ties beyond a
current wealth management joint venture but rumors about a deal
continue to surface at regular intervals. Traders who agree that
investment banking stocks will continue to perform well, now that
interest rates have been reduced further, should consider this
conservative position. We will target a higher premium in the
spread to allow for any near-term consolidation in the issue.
MER - Merrill Lynch $69.98
PLAY (conservative - bullish/credit spread):
BUY PUT JUN-55 MER-RK OI=1346 A=$0.40
SELL PUT JUN-60 MER-RL OI=2293 B=$0.85
INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12%
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MER
*******************************************************************
NVLS - Novellus Systems $52.85 *** Chip Sector ***
Novellus Systems (NASDAQ:NVLS) manufactures, markets and services
advanced systems used to deposit thin conductive and insulating
films on semiconductor devices, as well as unique equipment for
preparing the device surface for these deposition processes. The
company supplies high-productivity deposition and also surface
preparation systems used in the production of integrated circuits.
Novellus focuses on advanced thin film deposition systems and
surface preparation equipment including processes such as Chemical
Vapor Deposition, Physical Vapor Deposition, photoresist strip,
electrofill, and residue removal systems that provide high film
quality while attaining the high levels of productivity required
to meet the semiconductor industry's need for high-volume, low
cost wafer production.
NVLS is one of our favorite issues in the semiconductor group and
stocks in the segment have moved higher in recent sessions after
some key analysts speculated that the worst conditions for chip
equipment companies have passed. Industry experts say they are
seeing sequential bookings improvement in the June quarter and
that a bookings "bottom" has been reached in the near-term. In
addition, some analysts believe the recent pullback in the chip
equipment group had created a buying opportunity as the industry
moves into a positive cycle that will produce increased earnings
estimates by early 2002. If that's the case, NVLS should provide
an optimistic outlook when the company reports quarterly earnings
in late May and investors who agree that the company is a leader
in the semiconductor equipment sector can speculate on the future
performance of its stock with these positions.
NVLS - Novellus Systems $52.85
PLAY (sell naked put):
Action Month & Option Open Closing Cost Target
Req'd Strike Symbol Int. Price Basis Mon. Yield
Sell Put JUN 40 NLQ RH 1282 0.80 39.20 7.1% ***
Sell Put JUN 45 NLQ RI 3615 2.00 43.00 13.3%
Sell Put JUN 50 NLQ RJ 4735 3.50 46.50 16.3%
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NVLS
*******************************************************************
Neutral Plays - Straddles & Strangles
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HGSI - Human Genome Sciences $61.67 *** Premium Selling! ***
Human Genome Sciences (NASDAQ:HGSI) researches and develops novel
compounds for treating and diagnosing human diseases based on the
discovery and understanding of the medical usefulness of genes.
The company has used automated, high speed technology to discover
the sequences of chemicals in genes and generate a collection of
partial human gene sequences. HGSI believes its large collection
includes most of the genes responsible for producing proteins in
the human body. The company also possesses one of the largest
databases of the genes of humans and microbes, which they refer
to as its genomic database and it has created a range of product
opportunities based on its genomic database. The company intends
to focus primarily on the research and development of proteins
for the treatment of human disease.
HGSI is an excellent issue in the "premium-selling" category of
options trading. The issue has robust premiums, a well defined
trading range in the near-term and an acceptable probability of
remaining between the sold (short) strike prices. Speculation
on new developments in "genome discovery" have pushed the (OTM)
premiums higher in recent sessions and this play will allow us to
benefit from the renewed buying pressure in HGSI's options. As
always, review the current news and sector outlook before making
your own decision about the future outcome of the position.
HGSI - Human Genome Sciences $61.67
PLAY (aggressive - neutral/credit strangle):
Action Month & Option Open Closing Cost Target
Req'd Strike Symbol Int. Price Basis Mon. Yield
Sell Put JUN 45 HHA RI 67 1.00 44.00 7.6% ***
Sell Call JUN 80 HBW FP 139 1.30 81.30 9.7% ***
- or -
Sell Put JUN 50 HHA RJ 205 2.00 48.00 13.5%
Sell Call JUN 75 HHA FO 356 2.00 77.00 14.1%
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=HGSI
*******************************************************************
NVDA - Nvidia $85.49 *** The Rally Continues! ***
Nvidia (NAADAQ:NVDA) designs, develops and markets 3D graphics
processors, graphics processing units and related software that
set the standard for performance, quality and features for every
type of personal computer user, from professional workstations to
low-cost PCs. The company's 3D graphics processors are used in a
wide variety of applications including games, the Internet and
industrial design. Its graphics processors were the first to
incorporate a 128-bit multi-texturing graphics architecture
designed to deliver to users of its products a highly immersive,
interactive 3D experience with compelling visual quality, with
realistic imagery and motion, stunning effects, and complex object
and scene interaction at real-time frame rates. The company sells
its products to major OEMs such as Compaq, Dell, Gateway, Hewlett
Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in
board manufacturers such as ASUStek, Creative Labs, Guillemot and
Leadtek.
Readers continue to request "premium-selling" positions and this
issue often surfaces on a list of candidates with relatively
positive trends and excellent option prices. Indeed, the company
is a leader in its industry and we also favor the stock for a
bullish position. In this case, will sell "out-of-the-money"
options for credit, using the earned income to offset any losses
on the downside, in the event of assignment. If the stock price
moves through the resistance area near $95 on a heavy-volume
rally, we will consider purchase the underlying shares, or an
offsetting position, to cover the sold (short) options.
NVDA - Nvidia $85.49
PLAY (aggressive - neutral/credit strangle):
Action Month & Option Open Closing Cost Target
Req'd Strike Symbol Int. Price Basis Mon. Yield
Sell Put JUN 55 UVA RK 1270 1.35 53.65 7.4% ***
Sell Call JUN 115 RVU FC 105 1.25 116.25 6.9% ***
- or -
Sell Put JUN 60 RVU RL 1512 1.80 58.20 9.7%
Sell Call JUN 110 RVU FB 1050 1.85 111.85 9.9%
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NVDA
*******************************************************************
BEARISH PLAYS - Naked Calls
*******************************************************************
EXFO - Electro-Optical $33.50 *** Technicals Only! ***
Electro-Optical Engineering (NASDAQ:EXFO) designs, manufactures and
markets fiber-optic test, measurement and monitoring equipment and
instruments for the telecommunications industry. The company makes
products primarily for two markets. The Portable and Monitoring
Division provides solutions primarily to telecommunications carriers,
cable television companies, public utilities, and private network
operators, as well as third-party installers and equipment rental
companies. The Industrial and Scientific Division designs a line of
more sophisticated and higher performance instruments for industry
manufacturers of optical components, value-added optical modules and
optical networking systems, as well as for research and development
markets.
This position was discovered with one of our primary scan/sort
techniques; identifying potential "failed" rallies on issues with
bullish options activity. In this case, the premiums for the (OTM)
call options are excellent and the possibility of a successful
technical recovery is significantly affected by the resistance at
the sold strike price; a perfect condition for a bearish position.
Those of you who agree with this outlook can attempt to profit
from the recent volatile movement in the issue by selling these
inflated options.
EXFO - Electro-Optical $33.50
PLAY (aggressive - sell naked call):
Action Month & Option Open Closing Cost Target
Req'd Strike Symbol Int. Price Basis Mon. Yield
Sell Call JUN 40 FQO FH 35 2.25 42.25 24.9%
Sell Call JUN 45 FQO FI 13 1.35 46.35 17.0%
Sell Call JUN 50 FQO FJ 0 0.75 50.75 10.2% ***
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EXFO
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